Comment: Joint venture could dial up a better deal for users

IT IS possible O2 and Vodafone may try and break up the UK mergerparty between Orange and T-Mobile. But I would not bet on it.

Crucially, the merger of Britain's third and fourth biggestmobile phone networks (Hutchison Whampoa's 3UK is the fifth player)would "only" create a giant with a 37 per cent market share.

This is just below the magic 40 per cent figure that regulatorsmay feel would be too much for the public to swallow on competitiongrounds.

O2 and Vodafone would face a much greater possibility of beingblocked by the Competition Commission if either of them went for thesmaller Deutsche Telekom-owned T-Mobile because it would take theirmarket share to 43 per cent and 40 per cent respectively.

Even so, the Competition Commission will be a little bit twitchyabout the UK joint venture of France Telecom-owned Orange and T-Mobile.

Such a move would see a telecoms behemoth controlling 30 millionmobile phone customers, with the number of the UK's major operatorsshrinking from five to four. (Interestingly, France Telecom'sfinance chief, Gervais Pelissier, has argued that even four licencesin the UK may be too many. One step at a time, though, Gervais...)

The regulatory concern will be that a business in such a dominantposition will have little incentive to offer good price packages tocustomers.

A merged Orange and T-Mobile in the UK could instead be temptedto prioritise their focus on existing customers rather than growtheir market share further, thereby opening the way to possibleprice rises.

Be that as it may, you can certainly see why the idea of a UKjoint venture is so appealing to both companies.

It is estimated the tie-up will cut the groups' costs in the UKby GBP 445 million from 2014, a figure which is expected to includecost efficiencies across networks, IT, marketing and advertising,and the two groups' 650-plus shops. Significant job losses among thecombined 19,000 workforce are virtually a given.

The combined network would have revenues of GBP 7.7 billion andheadline earnings of GBP 1.7bn. As many European mobile networkmarkets are reaching relative maturity, that sort of financial cloutwill be helpful in exploring new geographical territories.

This is particularly necessary when the UK and European marketsare so cut-throat after the last two decades of intense competition.

So it would be surprising if Orange and T-Mobile did not maketheir pitch to the regulator that the multi-million-pound savings tobe made from the tie-up will pave the way to invest in newtechnology that can only benefit of Britain's mobile phone users.

The network coverage for customers of the two groups will alsoobviously get far better with a merger.

But one issue is how far regulators will want to nail down inblack-and-white such commitments to new technology and othercustomer-benefiting initiatives.

Some would argue that an outright sale of T-Mobile would havebeen better. A joint venture often has the potential to be messybecause one side is not taking complete operational control. But,conversely, Deutsche Telekom may not have got a good price in astraight sale precisely because of the regulatory complications anduncertainties.

France Telecom may also not have fancied raiding the coffers fora cash takeover of T-Mobile as it is labouring under 35bn (about GBP30bn) of debt from an acquisition spree during the internet bubblethat nearly bankrupted the group.

As a result, perhaps for both financial and regulatory reasonsthe two groups felt a joint venture in the UK was the best wayforward.

Looked at baldly, it is hardly a merger in the UK from a positionof strength. Apart from France Telecom's debt problems referred toabove, T-Mobile was put up for sale earlier this year by its parentafter seeing three consecutive quarters of negative sales growth.

But, without doubt, such a deal will change the competitivedynamics of the UK "I'm on the train" mobile phone market.

Regulator permitting, Orange and T-Mobile (it is yet to bedecided which brand will eventually be retained) will have much moreclout due to their streamlined joint UK costbase and will be able togive current market leaders O2 and Vodafone a run for their money.